early withdrawl of ira to pay off mortgage


M

matt

let's say i have 250k in my ira and i owe 100k on my
mortgage. my monthly payments are about 60% of my monthly
take home. anticipating more mouths to feed in the next
year or two, does it make sense to pull the money out of the
ira and pay off the mortgage to reduce debt load? basically
i want to lower my mortgage load if there are other ideas.

thanks
 
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C

Christopher Green

let's say i have 250k in my ira and i owe 100k on my
mortgage. my monthly payments are about 60% of my monthly
take home. anticipating more mouths to feed in the next
year or two, does it make sense to pull the money out of the
ira and pay off the mortgage to reduce debt load? basically
i want to lower my mortgage load if there are other ideas.
The marginal tax rate and penalty on a $100K withdrawal will
eat maybe half of your funds. (In California, it could be a
lot more than half.) Unless you have an overwhelming need to
be free of debt, it's a very expensive thing to do.

You can avoid the penalty by doing a so-called 72(t)
distribution of "substantially equal periodic payments"
figured over your life span; there's lots of information and
calculators on the Net for how much you can take out without
triggering a penalty. It's wise to work with an IRA
custodian that knows what they're doing when it comes to one
of these, as the calculations are not for the math-phobic.

Then you pay your mortgage out of the taxable but
penalty-free income stream from the 72(t). Your mortgage
interest deduction will offset much of the tax on the 72(t)
distribution, until the late years of your mortgage anyway.

The drawback is that you have to continue the 72(t)
distribution until the year you turn 59-1/2; this may be
more taxable income over a longer period of time than you
wanted.
 
P

Paul A. Thomas

matt said:
let's say i have 250k in my ira and i owe 100k on my
mortgage. my monthly payments are about 60% of my monthly
take home. anticipating more mouths to feed in the next
year or two, does it make sense to pull the money out of the
ira and pay off the mortgage to reduce debt load? basically
i want to lower my mortgage load if there are other ideas.
There's not enough information to tell if in the long run
you'll come out ahead.

In general though, that $100K will be taxed at probably
close to 30%, with another 10% penalty tax on top of that,
plus any state income tax. So that will cost you $40K + up
front.

Then factor the loss of that amount for future needs (like
in retirement), the loss of the tax deferred earnings that
$100K will generate over the years, the loss of the mortgage
interest deduction over any number of years, and the list
goes on and on.
 
V

Vernon V Chatman III

matt said:
let's say i have 250k in my ira and i owe 100k on my
mortgage. my monthly payments are about 60% of my monthly
take home. anticipating more mouths to feed in the next
year or two, does it make sense to pull the money out of the
ira and pay off the mortgage to reduce debt load? basically
i want to lower my mortgage load if there are other ideas.
If your mortgage payment is 60% of your take home, you most
likely are overextended even if this is your only debt.
I'll assume you know that and that is why debt reduction is
a priority for you.

What is the remainder term on your mortgage? Your note
implies it is longer than two years. If it is less than two
years, maybe you can just do nothing if your income is
secure for that time period--you do not want to lose your
home.

Do you have other resources, such as a 401k, where you would
have access to funds without the penalties associated with
an IRA withdrawal? Can you move IRA funds to a 401k?

What is the age of your mortgage, what is the interest rate?
Have you considered a refinance?

Are you currently making contributions to an IRA or
401k-like plan? Have you considered redirecting some of
those payments to your mortgage?

Does it make sense to sell-down; i.e., buy a new home and
have no mortgage.

Assuming you have worked your way through the above issues,
and IRA withdrawal is your only option for debt reduction,
you should first reduce any NON-mortgage debt that you have
(and NOT re-incur that debt until your total debt is
substantially reduced).

Others have appraised you of the tax/penalty issues on the
withdrawal. However, given your situation there is another
dimension: what is your pretax contribution to the IRA?

In somewhat simplistic terms, if your pretax contribution is
less than $50K, paying off the $100k of debt plus any tax
and penalties is paid from the growth produced by the
pre-tax contributions.

Even if the mortgage cannot be paid off entirely from
growth, this might be a reasonable course of action
considering your debt load.

As you can see from the above, there is no one answer as it
depends on the specifics of your situation. But is seems
evident you need to do something about your debt level.
 
G

GenFinSvcs

let's say i have 250k in my ira and i owe 100k on my
While I agree with the comments of my colleagues, you have
essentially asked a nontax question. Generally, when you
mortgage payments begin to exceed 45% of your income you are
approaching, if not already in, economic trouble.

Besides the comments alreay made, it may be possible that
with the current mortgage market, you could refinance your
mortgage and only take out enough money to bring your
payments to a level you feel more comfortable with.

The best recommendation that can be given is to sit down
with a financial planner with tax expertise and review you
situation in depth.
 
M

matt

hi, thanks for the response. answers below.

Vernon V Chatman III said:
If your mortgage payment is 60% of your take home, you most
likely are overextended even if this is your only debt.
I'll assume you know that and that is why debt reduction is
a priority for you.
yes, we're currently on 2 incomes (for 1 income it would be
60%) so i'm trying to reduce the debt load in anticipation
of perhaps one of us having to stop work for the kids.
What is the remainder term on your mortgage? Your note
implies it is longer than two years. If it is less than two
years, maybe you can just do nothing if your income is
secure for that time period--you do not want to lose your
home.
we're on the first year of a 7-23ARM at 4.375% (it's
actually a jumbo loan). i used fabricated numbers in an
attempt to simplify the calculation.
Do you have other resources, such as a 401k, where you would
have access to funds without the penalties associated with
an IRA withdrawal? Can you move IRA funds to a 401k?
perhaps we could move the ira to a 401k now that we're with
a company that has 401k. are you thinking of a loan against
the 401k?
Are you currently making contributions to an IRA or
401k-like plan? Have you considered redirecting some of
those payments to your mortgage?
yes still contributing to 401k with the new company. was
just toying around with some ideas before i actually commit.
Does it make sense to sell-down; i.e., buy a new home and
have no mortgage.
we prefer not to as we really like the house. however,
taxes increased double digit percentage last year on our
house so that is yet another concern.

even if we couldn't pay it off entirely, does one normally
try and refi when they can afford to pay down the loan such
that the monthly debt load is manageable?
 
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S

Seth Breidbart

matt said:
even if we couldn't pay it off entirely, does one normally
try and refi when they can afford to pay down the loan such
that the monthly debt load is manageable?
That would depend on the interest rate you could get: if it
dropped (enough), sure, it's worth refinancing (even if you
don't pay anything down). If it's higher, you don't want to
refinance.

Also, since you're in the first year, almost all of the
payments are deductible; are you including that fact in your
"60%" calculation?

Finally, if you plan to need the lower payments for only a
short time period (e.g. 2 years), it's probably a lot more
efficient to withdraw only enough to cover the excess
payments for 2 years rather than to pay down the principle
enough to lower the payments for the full term. In that
case, you might even consider refinancing to a different
type of mortgage (e.g. a 3-year adjustable might have a much
lower sucker rate).

Seth
 
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V

Vernon V Chatman III

We are well beyond tax issues here.

matt said:
yes, we're currently on 2 incomes (for 1 income it would be
60%) so i'm trying to reduce the debt load in anticipation
of perhaps one of us having to stop work for the kids.

we're on the first year of a 7-23ARM at 4.375% (it's
actually a jumbo loan). i used fabricated numbers in an
attempt to simplify the calculation.
Withdrawals to deal with this should be in a one-income
tax-year.
perhaps we could move the ira to a 401k now that we're with
a company that has 401k. are you thinking of a loan against
the 401k?
So-called 401k loans are not really loans, but could make
sense in your situation.
yes still contributing to 401k with the new company. was
just toying around with some ideas before i actually commit.
we prefer not to as we really like the house. however,
taxes increased double digit percentage last year on our
house so that is yet another concern.
Financially stressed parents do not always make the best
parents (emotionally). A child may sense the stress created
for their parents. Choose a house that fits the family's
total needs.
even if we couldn't pay it off entirely, does one normally
try and refi when they can afford to pay down the loan such
that the monthly debt load is manageable?
One might re-fi an ARM to get a fixed rate. With an ARM,
you could find that debt manageable today could be
unmanagable next year.
 

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